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    I thought I would use graphical analysis to explain why AUSTERITY IS A REALLY BAD IDEA DURING A FISCAL CRISIS! I am not an economist, but I have spent 20 years teaching graphical analysis and climate change to non-science majors. While I want my students to understand climate change, I also want to convince them that the tools I use to simplify the complexity of climate change could be used in business, in marketing, even in criminal justice. If you can read graphs you do not need to be an expert to predict how a complex system will respond to change. All you need is a willingness to think, to imagine and to accept what the graphs tell you.

     So after 20 years of preaching to my students, I thought I’d put my money where my mouth is and see if I could use graphs to show just how bad an idea the SERIOUS PEOPLE are pushing when they demand austerity budgets. I think I have succeeded. Follow below to see if you agree.

    In science we often work on the idea of causality, that a change in A causes a change in B. We add CO2 to the atmosphere, and the atmosphere gets warmer because CO2 traps the heat. But many systems, including climate are not so direct.  A does not only change B, but B can change A. Feedback in the climate system means that not only does the atmosphere warm from increased CO2, but warming can cause CO2 to increase.

    Economic variables are also interdependent. Take employment and demand. If employment goes up, people have more money to spend and this leads to increased demand.  Increased demand leads factories to hire more workers so employment goes up. Or, if employment goes down, then people have less money to spend and demand goes down, etc. These relationships can be summarized in two schematic graphs.

    The graph on the left shows how employment changes might impact demand. I have imagined that the effect is not linear, especially when related to a fiscal crisis. At high rates of employment (c) increases in unemployment are buffered by people’s savings or their ability to borrow money and so demand decreases, but not particularly rapidly. However, at some point (b), for example when the housing bubble burst, even people who did not lose their jobs were afraid that they might, probably lost much of their savings as the values of their houses fell and could not borrow any more money because the banks wouldn’t lend it. Demand falls rapidly until people have cut just about as much as they can from their spending. Then at (a) the impact of further unemployment on demand decreases.  

    In the opposite direction, should conditions correspond to (a) and begin to improve, people at first use their money to pay down their debt and so demand increases slowly. As people become more optimistic, pent up demand from not having bought that new car for 5 years bubbles over and increased employment leads to rapid increase in demand through (b). Finally, increased demand slows again as people have caught up with their needs and wants.

    The second graph is much simpler with an increase in demand always causing a proportional increase in employment. This probably is not true as employers often avoid hiring during the early stages of economic recovery, but I don’t think that avoiding these kinds of complications hurts the analysis.

    The next step is where graphical analysis begins to get serious. Because the variables are interdependent, we can overlay the two graphs with a little rotation so the Demand axes and Employment axes are properly placed.  What jumps out of the

graph is that there are three special locations – the three intersections. These represent the only combined values of employment and demand that are balanced or are at equilibrium. Every other point on the graph will be out of whack relative to at least one of the variables and so will cause the system to adjust until a balance, one of the intersections, is reached.

    A next step is to recognize that neither variable depends solely on the other. Employment and demand are both affected by many other factors. To consider just demand as driven by employment only considers the consumer aspect of demand. As we know, government spending can have a major impact on demand, and a lot of the current debate over the fiscal road bump reflects that. The Republicans and many serious people argue for austerity. The Democrats, progressives and economists who have studied historical effects of government spending argue for stimulus. The next graph modifies the employment – demand graph to include three possibilities relating to three levels of government spending. (1) might correspond to normal levels, (2) to reduced levels or austerity and (3) to increased levels or stimulus. For any level of employment, demand by line (3) is greater than either lines (1) or (2) because of extra government spending or demand.

    To complete the analysis so that we can see the effect of stimulus and austerity on the system, we once again overlay the graphs. If we consider our current situation with low employment and low demand, we are at the intersection marked with the filled red circle. If we reduce demand by cutting government spending, the effect is lower demand and lower employment, the open red circle. Austerity leads to the absolutely wrong result. On the other hand, if there is enough stimulus, the balanced condition of low employment and low demand disappears and there is only one place in the system that remains in balance, the green circle. This would be a good thing, because the system would have to change towards higher employment and demand.
    To summarize: AUSTERITY IS BAD! It leads to absolutely the wrong the result, fewer jobs and more unemployed. You can see this in living color, right there on the graph. As Rasheed Wallace would surely say –“Math don’t lie”.

     Stimulus, if it is LARGE ENOUGH, can provide the oomph to return the economy to pre-crash levels of employment and demand. The “large enough” condition is a real concern. The 2009-2010 stimulus was not large enough and so did not move the D/E curve far enough to eliminate the low employment intersection. Conditions improved, but incrementally and not enough.

    Obviously the analysis is not conclusive because the system is much more complex than the assumptions allow.  However, I think there is a real kernel of truth here and for those of us who like to see things – who are visual learners – graphical analysis is an absolutely wonderful tool, only limited by our imaginations.  Use it in good health.

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